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Commercial Division Blog

In an effort to foster communication between the Commercial Division bench and bar, from time to time we will be posting interviews with sitting or retired Commercial Division justices and court staff. Retired Nassau County Commercial Division Justice Ira B. Warshawsky has graciously agreed to serve as our inaugural interviewee from his new home at Meyer Suozzi English & Klein, P.C.’s Litigation and Alternative Dispute Resolution Practice. Before retiring, Justice Warshawsky served as a Supreme Court Justice for fourteen years, the last ten of which were in the Commercial Division. In addition to his judicial duties, Justice Warshawsky has served as a director of the Nassau Bar, is the former Dean of the Nassau Academy of Law, is a frequent lecturer for the National Institute of Trial Advocacy, has served as a contributing editor of the Benchbook for New York Trial Judges, was the past-President and charter member of the American College of Business Court Judges, and is a member of the Advisory Board of the Sedona Conference.

With deep appreciation to the Justice, here are ten questions for Justice Warshawsky:

While we normally do not blog about Second Circuit decisions, that court’s decision in Licci v. Lebanese Canadian Bank, SAL, No. 10-1306-cv (October 18, 2013), shows the difficulties that can arise when state and federal appellate courts interpret New York law differently.

Licci involves claims by American, Canadian, and Israeli citizens who were killed in rocket attacks in Israel that were carried out by Hizballah (aka Hezbollah) in 2006. Instead of suing their attackers, the Licci plaintiffs sued the banks that their attackers used to facilitate the logistics of carrying out the attacks: Lebanese Canadian Bank (“LCB”), a Lebanese bank with no operations, employees, or branches in the United States, and American Express Bank Ltd. (“Amex”). LCB maintained a correspondent bank account with Amex in New York. According to plaintiffs, LCB used this correspondent account to wire millions of dollars on behalf of Hizballah knowing that these wire transfers would enable Hizballah to carry out its rocket attacks.

On October 17, 2013, Justice Bucaria of the Nassau County Commercial Division issued a decision in National Grid Corporate Services, LLC v. LeSchack & Grodensky, P.C., 2013 N.Y. Slip Op. 23354, highlighting a significant procedural difference between litigating commercial cases in New York’s state and federal courts: which claims can be tried by a judge versus a jury. Unlike federal courts, New York does not permit a jury trial where claims seeking legal relief and claims seeking equitable relief are alleged in the same complaint. Indeed, a jury trial can be lost even if a plaintiff’s initially-pled equitable claims are subsequently withdrawn or dismissed, leaving only the claims seeking money damages to be tried.

National Grid Corporate Services (actually two cases that were consolidated) involves a dispute between a law firm and its former client over unpaid legal fees. The claims asserted by the client included declaratory relief that the client had terminated the law firm for cause, a claim for disgorgement of legal fees, an alternative claim for quantum meruit if the client was found not to have terminated the law firm for cause, conversion, unjust enrichment, monies had and received, and breach of fiduciary duty, an accounting, a declaratory judgment for a retaining lien, and a breach of contract claim relating to a collection services agreement. The law firm initially filed a note of issue seeking a jury trial but subsequently moved to withdraw its jury demand, which it could do only if the former client consented or if it was not entitled to a jury trial in the first place. Justice Bucaria granted the motion to withdraw the jury demand on the ground that the former client’s unjust enrichment claim (even though it sought money damages) was an equitable claim and thus defeated the right to a jury trial.

The lesson to be learned from this decision is that, as tempting as it is to plead alternative causes of action in a complaint, sometimes plaintiff’s counsel can plead away the plaintiff’s right to a jury trial by including duplicative equitable claims along with legal claims for money damages. This may be an awfully high price to pay for the alternative relief requested.

On October 16, 2013, Justice Bransten of the New York County Commercial Division issued a decision in Dexia SA/NV v. Morgan Stanley, 2013 N.Y. Slip Op. 51696(U), dismissing on the pleadings causes of action sounding in common-law fraud brought against the underwriters and sponsors of residential mortgage-backed securities (“RMBS”) by both the entity that purchased the RMBS for $626 million and by the assignees to whom the RMBS were sold at face value via a put option transaction.

Justice Bransten dismissed the assignees’ claims for lack of standing because (a) the documentary evidence submitted by the defendants (the assignment documents) conclusively established that the purchaser of the RMBS had assigned only “all right, title and interest in the Put Settlement Assets,” and (b) under New York law, “absent language demonstrating an intent to do so, tort claims do not automatically pass to an assignee.” Here, Justice Bransten held that the assignment language did not demonstrate an intent to assign common-law fraud claims, and thus dismissed the assignees’ claims for lack of standing based on documentary evidence.

Turning to the fraud claims asserted by the purchaser, Justice Bransten dismissed those as well based on New York law limiting the damages recoverable by a fraud victim to its out-of-pocket losses and prohibiting a fraud plaintiff from recovering its expectation damages. Because the documentary evidence submitted by the defendants conclusively established that the purchaser of the RMBS had been paid by its assignees at least as much as the purchaser paid for them, Justice Bransten held that the purchaser could not, as a matter of law, plead fraud damages.

This case illustrates two important lessons for both the commercial transaction lawyer and the commercial litigator: (1) if you are negotiating the purchase of an asset on behalf of an assignee, make sure you include explicit language in the assignment that any tort claims held by the assignor are being assigned to the assignee, or those claims will not pass to your client; and (2) if you are a commercial litigator whose client has been the victim of an alleged fraud, make sure they suffered an out-of-pocket loss or they will be without a remedy. In that regard, however, be aware that New York courts do not always enforce the out-of-pocket fraud loss rule consistently or strictly. For example, in Roni LLC v. Arfa, 74 A.D.3d 442 (1st Dep’t 2010), aff’d, 18 N.Y.3d 846 (2011), the First Department affirmed New York County Commercial Division Justice Charles Ramos’ denial of a motion to dismiss a fraud claim on the pleadings in a case where real estate investors were suing the promoters of the real estate investments for failing to disclose (or affirmatively misrepresenting) certain commissions they received from the sellers of the real estate. The defendants had argued that the fraud claims should be dismissed because, when the real estate was later sold, the plaintiffs recouped more than they had initially invested, although not as much as they would have recovered had the commissions not been paid by the sellers to the defendants. Justice Ramos and the First Department disagreed. According to the First Department, “plaintiffs sufficiently alleged damages by asserting that they suffered actual pecuniary loss in the amount of the secret commissions that inflated the purchase prices of the properties that the LLCs acquired.”

On October 17, 2013, the Court of Appeals issued a decision in Matter of Belzberg v. Verus Invs. Holdings Inc., 2013 NY Slip Op. 06729, addressing the extent to which a person who is not a party to an agreement to arbitrate can nonetheless be required to arbitrate.

The Court of Appeals started with the general proposition that “nonsignatories are generally not subject to arbitration agreements,” but that courts have created an exception under the “direct benefits theory of estoppel,” where “a nonsignatory may be compelled to arbitrate where the nonsignatory ‘knowingly exploits’ the benefits of an agreement containing an arbitration clause, and receives benefits flowing directly from the agreement.”

In Matter of Belzberg, Belzberg, an investment advisor, opposed being brought into the arbitration because he was not a party to the contract containing the arbitration clause. The facts of the case show that Belzberg had benefited from the transaction to which the agreement related. Belzberg had directed a corporation owned by a trust he had established, and for which he served as an unpaid financial advisor, to transfer $5 million to Verus Investment Holdings, so that it could be invested. Verus invested that money, along with $1 million of its own funds, using Verus’ account at Jefferies & Co., Inc. After the investment gained in value, Jefferies returned both Belzberg’s original $5 million investment and the profits to Verus. Verus subsequently distributed those funds to a friend of Belzberg’s, at his direction. When a dispute subsequently arose about whether Jefferies owed the Canadian government withholding tax on the profits, Jefferies sought to bring Belzberg into an arbitration brought pursuant to the arbitration clause in the agreement between Jefferies and Verus.

Notwithstanding the clear benefit to Belzberg and to parties with which he was associated, the Court of Appeals ruled that he was not bound by the arbitration clause in the agreement between Verus and Jefferies because “[t]he guiding principle is whether the benefit gained by the nonsignatory is one that can be traced directly to the agreement containing the arbitration clause” (emphasis added). Thus,

[t]he mere existence of an agreement with attendant circumstances that prove advantageous to the nonsignatory would not constitute the type of direct benefits justifying compelling arbitration by a nonparty to the underlying contract. Also, absent the nonsignatory’s reliance on the agreement itself for the derived benefit, the theory would extend beyond those who gain something of value as a direct consequence of the agreement. (Emphasis added.)

This case illustrates how difficult it can be to bring a non-signatory to an agreement to arbitrate into an arbitration and suggests that litigants should, in the first instance, look for a forum into which all parties can be brought.

On October 16, 2013, Justice Bransten of the New York County Commercial Division issued a decision in Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 2013 NY Slip Op. 51673(U), addressing the scope of the common interest privilege in the context of a corporate merger. Justice Bransten held that, contrary to rule applied by some federal courts, “New York law does not allow a privilege claim under the common-interest doctrine unless there is pending or reasonably anticipated litigation.”

Justice Bransten noted “that there is no litigation requirement when two parties consult with one attorney.” Thus, parties for whom it is important to create a common interest privilege outside of the litigation context should considering engaging joint counsel for that purpose.

On October 3, 2013, Justice Friedman of the New York County Commercial Division held in Roberts v. Korwin, 2013 N.Y. Slip Op. 51637(U), a legal malpractice action, that a written, formal litigation hold memo was not necessary to trigger the obligation to preserve documents once a party was on notice of a possible claim, writing:

Once a party reasonably anticipates litigation, it must, at a minimum, institute an appropriate litigation hold to prevent the routine destruction of electronic data. Greenberg Traurig submits no authority that the litigation hold must always be written and that the form of the litigation hold may not vary with the circumstances.

On October 3, 2013, Justice Kornreich of the New York County Commercial Division issued a decision in MBIA Ins. Corp. v Credit Suisse Sec.(USA) LLC, 2013 NY Slip Op 32404(U), addressing whether to order disclosure to defendant of “all communications between” certain key witnesses and plaintiff’s counsel, including “all versions, drafts, or iterations of the affidavits that formed the basis for the” complaint “and the witnesses’ deposition testimony.” The court’s recitation of the relevant facts shows the key issue—the apparent close involvement of plaintiff’s counsel in the witnesses’ testimony:

[Plaintiff] paid substantial sums of money (in certain cases, more than $10,000) to the witnesses and flew the witnesses from across the country to New York so that they could recount their knowledge of (and possible participation in) defendants’ fraudulent business practices. . . . Plaintiff’s counsel worked with these witnesses to draft affidavits detailing their knowledge of the fraud [and] . . . also extensively prepped them prior to deposition and defended their testimony against cross-examination by defendants. . . . Several of the witnesses began to recant their testimony or indicated that what was written in their affidavits was the work of [plaintiff’s] counsel and was not entirely an accurate description of their knowledge.

Justice Kornreich ordered the disclosure. In so doing, she acknowledged that:

The question before the court is not whether the use of confidential witness testimony in a complaint automatically entitles a defendant to obtain all documents and communications between the witnesses and plaintiff’s counsel. Rather, the issue is whether, once defendants have laid a foundation giving rise to a reasonable suspicion of a witness dissembling, fairness militates in favor of disclosure.

Justice Kornreich found that it did, and ordered the disclosure. The lesson here seems plain: there is nothing wrong with paying a reasonable rate for a witness’s time or discussing their testimony with them, but when counsel creates the appearance that it has crossed the line from gathering facts to manipulating them, trouble is bound to follow.

On October 7, 2013, we noted that on September 10, 2013, the Court of Appeals heard argument in Merrill Lynch, Pierce, Fenner & Smith Inc., v. Global Strat, Inc., Docket No. 160, a case examining the extent to which a sanction of default can be imposed for discovery violations. On October 10, 2013, the Court of Appeals issued its decision on that appeal.

In a brief, unsigned memorandum decision, the Court of Appeals reaffirmed the availability of sanctions for failing to comply with discovery obligations, including the entry of a default judgment against a non-complying party. However, the Court of Appeals held that the trial court abused its discretion in imposing such a sanction on the individual defendants-appellants because the sanction imposed—the entry of a default judgment—was disproportionately harsh compared to the alleged discovery abuse. Among the factors that the Court of Appeals considered were that the sanction was for the failure of the individual defendants to produce documents that related to businesses that the individual defendants controlled at a time when the individual defendants had yet to answer the complaint and against whom a discovery stay had been granted, that the plaintiff had not sought a default judgment, and that the report of the referee to whom the trial court had referred the discovery dispute did not contain the factual basis for the imposition of a default sanction. In light of all these factors, the Court of Appeals remanded the matter back to the trial court for the imposition of an appropriate sanction presumably upon a better record.

While this is a case in which a default sanction was vacated, it serves as a cautionary tale for parties that do not comply (or who create the appearance of not having complied) with their discovery obligations. Here, the individual defendants had to go all the way to the Court of Appeals to get a sanction (which included a huge money judgment) reversed that was imposed against them at a time when the case against them was stayed and where the referral to the referee did not even include the question of whether such a sanction should be imposed. Litigants with less compelling excuses should continue to beware the trial court’s broad discretion to impose sanctions—even a default sanction—for refusing to meet their discovery obligations.